Fitch Ratings has affirmed
The ratings reflect the group's leading market position in mobile and fixed-line segments as well as a relatively moderate financial profile.
The Negative Outlook reflects the continuation of a deterioration in the company's credit profile as a result from the challenging competitive environment in
Key Rating Drivers
Leverage Weakening: TMCH has historically had one of the strongest financial structures in the region, with net leverage metrics historically around 1.0x supported by consistent cash flow generation. However, Fitch projects the company's financial structure will weaken, particularly when considering the impact of lease obligations, as the effects of the sale of the fiberco and competition in the Chilean telecom market limit EBITDA growth. Fitch expects net debt to rise as cash flow is used for dividends to the parent company, resulting in projected net leverage increasing to around 1.8x in 2023, and 2.9x on a lease-adjusted basis.
Reduced Profitability: The sale of the 60% stake in the fiber infraco in 2021 has pressured TMCH's EBITDA as the company's opex now includes higher expenses due to connectivity to the infraco's fiber optic network. Operating expenses are also elevated due to higher expenses associated with TV content and commissions. Post-tax cash inflows from the sale of the fiberco stake have been upstreamed to the parent company, contributing to an increase in leverage metrics. Positively, the fiberco will be responsible for all of its own capex as
Challenging Mobile Environment: Fitch expects the mobile segment to grow modestly over the coming years as competition remains fierce in the four-player Chilean market. Mobile service revenues grew a modest 3% yoy in 2021 despite strong subscriber growth of 7% as ARPUs in both prepaid and postpaid have been under pressure due to competition. Positively, the company has continued to steadily increase its relative share of postpaid users, with over 61% of mobile subscribers in 1H22 on a postpaid plan compared with 56% at YE 2020.
Leading, Diversified Competitive Position: TMCH's diverse revenue streams offset its lack of geographic diversification, and the company has solid market share positions across the fixed and mobile segments. TMCH is the second-largest mobile provider (24% of subscriber market share) and TCH is the largest broadband (31%) and second-largest pay TV (20%) provider in the country, while key competitors
Broadband Drives Fixed Line Growth: Fixed segment revenues have grown rapidly in recent years driven by market share gains in broadband and pay-TV subscribers. Supported by its market-leading fiber broadband service offering, the company has surpassed VTR to become the industry leader in broadband internet. Furthermore, bundling offers and a strong IPTV product have allowed the company to grow its market share in pay-TV. While competition in fiber should increase as competitors expand their own fiber networks, Fitch anticipates that TCH will maintain its dominant position in fixed telecom services. With broadband penetration in
Parent Subsidiary Linkages: TMCH and TCH both possess strong stand-alone credit profiles, in line with their rating level. Fitch equalizes the two companies' ratings, given the shared operational and administrative functions, along with the material dividend remittances from TCH up to TMCH. The complementary nature of the companies' product portfolios further supports Fitch's assessment of strong strategic linkages. TCH and TMCH are rated one notch higher than the ultimate parent
TCH's Equity Rating: TCH's listed stock accounts for less than 1% of the company's equity. The rest is held by TMCH. The equity rating for TCH is Level 4(cl), given the low level of free float due to the majority stake ownership by TEF. This is mitigated by its solid solvency and long history in the Chilean stock market.
Derivation Summary
Compared with
Compared with domestic competitors
TMCH's lower leverage and higher FCF also compare favorably with sister companies
Key Assumptions
Mobile subscribers surpassing 8.0 million as the company's postpaid penetration continues to increase; blended mobile ARPU (service + handsets) declining to
Fiber homes passed increasing to around 4.8 million by FY 2024, with take up rate (homes connected/homes passed) increasing from 37% to around 39%, some gains in IPTV while fixed voice continues its secular decline;
Overall revenues growing to around
EBITDA margins below historic averages, settling below 20%, mainly due to wholesale network charges associated with the fiberco (around 40% of broadband revenues);
Capex declining from elevated levels in 2021, which were mainly affected by significant mobile network rollout, while the capex related to fiber will decline beginning in 2022 following the fiberco divestment in 2021; Capital intensity will be in the mid-teens range to support the company's network;
FCF expected to be negative over the rating horizon reflecting dividends and weaker profitability.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade is unlikely, due to the competitive pressures in the Chilean market;
Stabilization of the rating will depend on improving profitability and cash flow generation while sustaining the company's market position;
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A deterioration in market position due to competition and/or regulation, resulting in negative FCF generation and net leverage increasing to over 2.0x, or lease-adjusted net leverage over 2.5x, on a sustained basis;
A higher degree of financial integration between the units of Telefonica HISPAM (
Excessive shareholder distributions, including from cash flow from operations or from additional asset sale proceeds being distributed to the parent company.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity:
Issuer Profile
Summary of Financial Adjustments
Lease Obligations: When appropriate to the issuer's business model, Fitch may present additional ratios to supplement the core approach.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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